Most commodity traders and analysts alike believe this year should see the investment funds returning to the commodities space after two years of fund flows moving out of commodities into equities and other high returning asset classes.
The reasoning for the calls are sound; the three biggest developed economies in Japan, Europe and the US are all showing solid signs of growth coupled with the fact that emerging markets are also exhibiting signs of solid upswings which justifies a return to form for the 23 materials that lost ground in 2013.
Demand on a paper trade basis may have to wait sightly, as equities are likely to demand more attention in the interim. However, the physical demand for the likes of agriculture and industrial metals should see pickups in the early half of 2014, as demand for the home continues to gain momentum.
What will be a major determinate of that call will come today when China releases its GDP data.
Cyclical equity plays, industrial metals and investors in resource risk currencies such as the AUD, BRL and ZAR will be watching the news out of China very closely, as it will set the tone not just for now but for the rest of the trading year.
The release will coincide with the release of industrial production, fixed asset investment and retail sales - all of which have been showing signs of slowing, which is something the newly-appointed central government and the PBoC have been actively monitoring and intervening though increased taxes, changes in ownership laws and fraudulent invoicing.
The slowing of key guidance figures coupled with the better-than-expected trade balance numbers (on a nominal basis) says to me that the GDP figure, whether it is good or bad, will be interpreted as bad for two reasons:
- If the figure beats expectations of 7.6%, the comments from markets are likely to suggest the PBoC has further room to clamp down on speculative lending, and can further rein in shadow banking to continue slowing China’s economy to a more sustainable level. This means growth and the demand for imports will slow and this will affect resource nations.
- If the GDP figure comes in-line or below expectations, it could lead to the market describing the number as a sign China is slowing at a greater rate than expected; this could show that China isn’t in as healthier shape as expected and growth will further deteriorate. However, it is unlikely the PBoC or the central government are going to intervene with stimulus or a looser monetary policy as it is looking to slow China to a rate it believes it is sustainable.
Both I believe are over hyped; the market is looking to poke holes in anything that shows signs of sustainability from China. However, I believe China is moving on a perfectly sustainable path; GDP moving to 7% to 7.5% over the coming years is perfectly acceptable, industrial production is holding and retail sales are increasing. China is moving towards a consumption nation and this can only be seen as a good thing from a resource-rich nation such as Australia, as the demand for commodities will remain.
The ‘boom’ (the rapid rise of China) is ending, but sustained demand is just as important to the Australian economy longer term. Today’s release is important to gauge the trading sentiment of 2014, however it is also important from a longer-term sustainability perspective; an in-line result I believe is the best results as it shows the current macro levers from the PBoC and the central government are working and are moderating China as planned and expected.
Ahead of the Australian open
The futures market from Saturday is suggesting the market will open up at 5305, meaning the ASX will be unchanged on the 10am bell (AEDT). However, with the US closed for Martin Luther King Day and the China GDP print due at 1pm (AEDT), the Australian market is like to tread its own path in the morning session before reacting to the China story. Be prepared for light trading and positioning early before trade ramps up in the afternoon on the open of Tokyo and Shanghai.